L–1: Fiscal Risk Management -
An Overview
IMF − Singapore Regional Training Institute Presenter
ST24.13 Course on Assessing and Majdeline El Rayess
Managing Fiscal Risks
May 27 – June 7, 2024
This training material is the property of the International Monetary Fund (IMF) and is intended for use in
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Outline
• What are fiscal risks?
• Why fiscal risk matter?
• What are their main sources?
• What are their key characteristics?
• How to analyze fiscal risks?
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Fiscal Risks – Definition and Sources
Definition Sources
• Macroeconomic shocks - e.g., lower growth,
The exposure of public finances to unexpected commodity price, interest rate and exchange rate
developments that may lead to fiscal outcomes fluctuation
deviating from expectations (as in the budget or
other forecasts). • Contingent liabilities – potential obligations that do
not arise until the occurrence of a particular discrete
event(s) in the future.
Note: Political risks – deviations caused by
policy changes – are not considered in this ► Explicit - backed by legal/contractual
definition. undertakings (e.g., guarantees, insurance
schemes)
► Implicit - perception/expectations that the
government would be morally obliged to intervene
in the event of a crisis(e.g., banking crisis, natural
disaster)
• Institutional weaknesses - e.g., lack of expenditure
control, poor revenue collection
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Fiscal risk management is important to avoid surprises
to public finances
• Fiscal risks can be sizeable, and often lead to undesirable fiscal consequences:
• Additional spending and/or lower revenues = higher deficits
• Potentially higher debt levels
• Possible refinancing difficulties
• Ad hoc responses to risks are usually more costly and disruptive.
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Fiscal risk realizations have been key drivers of debt
increases globally
General government debt forecasts for advanced economies at different points in time
(Percent of GDP)
October 2022
20% of GDP
October 2019
37% of GDP
April 2007
Source: IMF World Economic Outlook (April 2007, October 2019, October 2022).
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Macroeconomic and fiscal positions have been severely
impacted by recent crise
Fiscal Aggregates and GDP – Deviations from Pre-Pandemic
Projections, 2019-24
Advanced Economies Emerging Markets Low-Income Developing Countries
Source: IMF, Fiscal Monitor April 2022
Note: Primary deficit is shown as a percentage of GDP. Pre-pandemic projections are from the January 2020 World Economic Outlook.
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Capacity to absorb shocks maybe running
low at present
Global Debt Levels
Median Interest Payment (Trillions of dollars, left scale; percent
(Percent of taxes) of GDP, right scale)
Source: IMF, Fiscal Monitor April 2023
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Fiscal outlook is heterogeneous across income levels
and regions
8 100 8 60
8 130
6 6 90 6
120
80 50
4 4 4
110 70
2 2 2
60 40
0 100 0 0
50
-2 -2 -2
90 30
40
-4 -4 -4
80 30
-6 -6 -6
Primary balance 20 Primary balance 20
Primary balance
70
-8 -8 10 -8
Gross debt (right scale) Gross deb (right scale) Gross debt (right scale)
-10 60 -10 0 -10 10
2019
2020
2021
2022
2023
2024
2025
2026
2027
2019
2020
2021
2022
2023
2024
2025
2026
2027
2019
2020
2021
2022
2023
2024
2025
2026
2027
Advanced Economies Emerging Markets Low-Income Developing Countries
Source: IMF, Fiscal Monitor April 2023
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Macroeconomic Risks:
Output volatility as an indicator
Volatility of Nominal GDP Growth, 2000‐2019
CV of growth in nominal GDP Median
IRN
LKA
IDN
MDV
MHL
BGD
SLB
MMR
THA
BTN
NRU
MYS
IND
MNG
TLS
WSM
TUV
VUT
PHL
KIR
FJI
TON
VNM
KHM
LAO
NPL
FSM
CHN
PNG
BRN
PLW
Source: WEO
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Specific Risks - Contingent Liabilities:
Major sources, frequency and size
Fiscal Cost of Contingent Liability Realization (1990 – 2015)
Global Contingent Liabilities with Macro-critical Impact
Source: Bova, E. et al, 2016, “The Fiscal Costs of Contingent Liabilities: A New Dataset”. IMF Working Paper 16/14.
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Contingent liabilities:
A non-crisis related phenomenon
Global Contingent Liability Realizations (1990-2015)
Source: Fiscal Monitor Database and IMF staff estimates.
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Contingent Liabilities:
Highly correlation and non-linear impact
CL Realizations Vs. Increase in Debt
Avg. CL Realization
Avg. Increase in Debt
0 5 10 15 20
Percent of GDP
Source: IMF 2016
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Fiscal risks:
A cost-probability matrix
At global level, macroeconomic risks and risks from the financial sector appear to be most important; the
matrix may look different for different countries.
Cost-Probability Matrix
10
Probability of occurrence (percent)
8
Macroeconomic
4
Financial Sector
2 Natural Disasters
SOEs
Legal Claims
Corporate
PPPs Subnational
0
0 2 4 6 8 10 12
Average fiscal cost (percent of GDP)
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Can Governments Realistically Eliminate Risks?
Not really.
• Eliminating all risks is not realistically possible.
• Risk aversion is often not desirable.
• One could argue that governments have an obligation to take certain risks.
◆ Market failure; social benefits
Focus on risk management, not risk avoidance.
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Country practices on fiscal risk management are still
evolving
FTE Results: Fiscal Risk Analysis and Management By Income Groups
(Average FTE score)
Fiscal Risk Disclosure
Coordination and Analysis
Risk
Management
Not Met = 0; Basic = 1; Good = 2; Advanced = 3
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Fiscal risk management:
A generic framework
Step 1: Identify, quantify and disclose fiscal risks
Identify sources of Calculate fiscal Estimate likelihood of
Disclose fiscal risks
risk exposure realization
Step 2: Decide whether to mitigate risks
Direct controls and limits on Regulation, incentives and Transfer and risk sharing
exposure other indirect measures mechanisms
Step 3: Decide whether to provision for risks
Expense fiscal costs in the Set aside financial assets in
Budget contingencies
budget buffer funds
Step 4: Decide whether to accommodate residual risks
Take into account in setting debt objective
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Analyzing Fiscal Risks:
Key questions to examine
Where does the source reside?
• Endogenous: those arising from a government activity (e.g., credit guarantees)
• Probability/impact can be influenced by the government
• Exogenous: those arising from actions/events outside of government control (e.g., natural disasters)
What is the nature of incidence?
• Continuous: regular events (e.g., commodity price volatility)
• Discreet: occurring irregularly (e.g., banking crisis); can be further classified based on likelihood:
• Probable – likely to materialize in near term
• Possible – likely at some point in time
• Remote – difficult to predict
What would be the likely cost for the government?
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How disclosing fiscal risks helps manage them better?
Disclosure (transparency):
• Ensures that governments have a good understanding of the potential fiscal
risks that may blow them off course.
• Allows an earlier and smoother fiscal policy response to changing macroeconomic
conditions and thereby reducing the incidence and severity of crises.
• Enables a better-informed policy debate - by policymakers and the public on
the design and results of fiscal policy
• Helps provide a sense of a country’s fiscal credibility
• Influences financial markets’ view of the country’s fiscal track record
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A few questions to think about as we progress
through this course
Q1. What are the major sources of fiscal risks your country is exposed to?
Q2. How is the current macroeconomic environment impacting the fiscal outlook of your
country?
Q3. How well are the risks analyzed and understood in your country?
Q4. Is there sufficient disclosure of fiscal risks in your country, and what could be done to
enhance it further?
Q5. What measures have been taken to mitigate risks, are they sufficient, and what more
could be done?
Q6. What institutional changes are required to support an effective fiscal risk management
function?
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IMF’s analytical tools to help governments
implement risk management framework
Better understand risk exposures
Improve management of fiscal risks
More transparent reporting of risks
More resilient public finances
Fiscal-Risks-Toolkit ([Link])
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Fiscal-Risks ([Link])
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Thank you
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